After watching this film for the first time, I see even another meaning. Based on what was posted regarding how the writer, Dennis Wheatley, and Lee himself disliked the ending, I think I see another meaning behind this film. At the end, as Widmark and Kinski are leaving the circle, there's a quote from the author:
In light all things thrive and bear fruit...
In Darkness they decay and die
That is why we must follow the teachings
of the Lords of Light
Now, anyone who understands esotericism knows that they believe that God is bad and that the devil is good or light. Wheatley was said to be an authority on the subject of the occult. I think what was done here was to give us an obscure ending so the backers of this film wouldn't see the hidden messages in it. Its my understanding they didn't like the original dark ending this story had so it was changed to what we see now. I think Catherine really did receive that thing inside her womb and that the reason Lee disappears is he ended up possessing Widmark. We've seen this before with the film, The Skeleton Key and the Mephisto Waltz. I think this ending was designed to go over the heads of the backers while for some, they get the fact that evil did win at the end.
Another piece of evidence I use to support my theory is the look in Widmark's eyes as he was trying to come out of the circle. It looked as if he was trying to overcome being taken by something. When he comes out of the circle and he calls Catherine, its as if he's trying to reassure her of who he is.
As for the other question you ask, I think that was a human baby that was sacrificed for the purpose of the ritual. I believe Widmark really didn't understand who he who he was fighting and that the priest knew of an obscure ritual to perform soul transference. Personally, I think that was his plan the whole time.
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